Abstract

In this article we examine whether the benchmark asset allocations recommended by financial planning groups for Australian private investors are optimal when measured against the mean-variance criterion of Modern Portfolio Theory. Using historical data for the relevant indices, the mean-variance properties of the various asset classes are determined. Portfolios containing the various asset classes are formed according to the allocations or weightings recommended by financial planning groups. The return-risk characteristics of the portfolios formed on the basis of the recommended asset class allocations are determined and a simple method of iso-risk maximum return calculation using the Excel Solver command is utilised to determine whether portfolios could be formed that are characterised by the same levels of risk but higher levels of return. These are ‘optimal portfolios’ that yield the maximum return for a given level of risk. Applying this methodology, the portfolios resulting from the financial planning groups’ benchmark asset allocations are found to be significantly suboptimal. On each occasion, a better portfolio (yielding a higher expected return for the same risk) could be found by adjusting the allocations.